Growing a Giant

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1、Growing a Giant COFCO is emerging as a power in the world of agricultural commodities at just the right time for China by Mark Godfrey Sitting in COFCOs comfortably modern offices in Jianguomen, the juncture of Beijings business and political districts, you get the feeling the company is moving fast

2、 into a bright future. Long at the heart of Chinas agricultural commodities trade, China National Cereals, Oils and Foodstuffs Corp (中粮集团) has reinvented itself from a protected monopoly grains trader to a food processor with products ranging from rice to fruit juice, wine and chocolate.As the count

3、ry eases away from a long-held policy of self-sufficiency amid rising global food prices, Chinas rising demand for commodities like corn and wheat has been a boon for COFCO which is using its long-established international network to source supplies. COFCO is starting to look a lot like trading gian

4、ts Cargill and Bunge.Indeed COFCO was in the news lately for its bid for Queensland-based sugar processor Tully Sugar. The Beijing-based firm joins peers like Cargill, Bunge and Singapore-based Wilmar in seeking to secure agricultural assets in Australia, a key exporter of commodities such as grain,

5、 meat and sugar. COFCO is also building alliances near home: it recently signed a cooperation agreement with Japan-based trading house Itochun to jointly source food products overseas.Given that it is one of just a few entities entitled to import grains into the country, COFCO seems well placed to s

6、atisfy Chinas needs as an increasingly wealthier population demands more proteins such as meat: a new surge of beef farming is one factor driving Chinese corn imports to record highs. Estimates from various commodities traders suggest China will import two million tons of corn in 2011, a huge increa

7、se given imports of the crop totaled 83,000 tons in 2009. Wheat imports rose 36% year-on-year to 1.2 million tons in 2010 while soybean shipments into the country hit 54 million tons last year according to the General Administration of Customs. Sugar imports in 2010 rose 66%, explaining COFCOs recen

8、t move for Tully.The prospect of rising food prices driven by increasing global demand and a shift of speculative money by hedge funds and other investors into agricultural commodities is good reason for China to turn to imports, given that domestic supplies will in any case be insufficient. A repor

9、t co-published by the OECD and Food & Agricultural Organization, a UN body, predicts real prices for cereals in the coming decade will be 20% higher than those recorded in the 2001-2010 period.Given that scenario there are sound reasons why China, through COFCO, will increase imports, which begs the

10、 question how well prepared the firm is to compete with seasoned players like US-based Cargill, which has over a century increased its presence from trading to production, trading and shipping of agricultural produce across the globe. With a global headcount of 130,000 the US firm accounts for 25% o

11、f US grain exports and controls 22% of the countrys domestic meat sales. As proof of its global reach, Cargill is also the largest poultry producer in Thailand. COFCO by comparison grew out of Chinas state-planned agricultural economy, enjoying a monopoly on agricultural exports and imports until re

12、forms in the late 1980s opened the sector up to competition. As trading powers were devolved to provincial governments, COFCO effectively saw its provincial divisions become its competitors, explains Kefei Yang, a Harvard University researcher who co-authored a 2009 report on COFCOs rise. For instan

13、ce the Jilin Grain Group Import & Export group became the dominant player in a key grain growing belt. COFCO ultimately adapted by shifting its focus to food processing, while also holding onto trading rights in several categories such as wheat and edible oils. The firm also slimmed down (halving it

14、s workforce to 60,000 between 1987 and 2007) and diversified into real estate and financial services: it owns the China-based Gloria hotel chain and has a rural-focused insurance joint venture with Aviva. COFCO has also focused on building brands in its portfolio, among them Great Wall wine and Le C

15、omte chocolate.Led by its multilingual president Patrick Yu COFCO appears to have come through its reforms in a good state. Looking ahead its future seems to rely on an ability to capitalize on reform of Chinas farm sector, according to an agricultural attach at an EU embassy in Beijing whos assiste

16、d COFCO look at possible acquisitions as well as business models in Western Europe. “COFCO is extremely well equipped to be Chinas biggest agricultural brand if it can aggregate all its international contacts and its access to provincial governments.”COFCO may have a bigger role to play from a polic

17、y perspective as China modernizes its agricultural sector and seeks further improvements in productivity and food safety. A set of research reports by Standard Chartered bank shows how sugarcane farmers in Guangxi Province achieve yields of 60 tons per hectare, well below a 90 ton yield achieved by

18、peers in Brazil ?C largely due to more backward harvesting techniques and technology.Standard Chartered chief and China economist Stephen Green points to a gradual shift to larger farms in fertile provinces like Guangxi as well-resourced investors come in to amass larger land banks which are then fa

19、rmed more efficiently using modern technologies. In China, where local governments rather than farm lobbies remain the key price setters for agricultural product, the opportunities for well-financed and professional operations like COFCO are obvious.This creates wide openings for COFCO to increase i

20、ts footprint in local farming, in the same way Cargill did in the US and Latin America. In some respects the firm has already been making that move, but has chosen high-growth categories, such as meat, rather than growing crops. Quick to compete with upstart private meat firms like Shineway and Zhon

21、gpin, COFCO has built a pig farm in Jiangsu capable of delivering 500,000 hogs per year to its slaughter house and processing plant, built near the farm. Shoppers in Beijing supermarkets will be familiar with COFCOs packaged pork products, adorned with the companys logo. Theyll be less aware that th

22、e firm is the largest shareholder of Mengniu, the dairy processing firm in Hohhot which competes with Yili for the top spot in Chinas dairy sales. The ability to consolidate its presence in two growth areas, pork and milk, is smart business for COFCO president Patrick Yu. The strategy is helped by C

23、OFCOs overseas ventures and an ability to draw expertise from its international partners. Much of the firms success in the meat processing trade for instance is down to a 4.5% share it took in US-based Smithfield, the worlds number one processor of pork in terms of volume.All looks well for COFCO in

24、 the business of food processing. A few vanity purchases have also proven smart moves: acquiring French and American vineyards for instance seems wise in light of Chinas growing thirst for face-giving foreign wines. The latest purchase, Chateau de Viaud in Bordeaux, is a far cry from the modest days

25、 of Chinas flagship Great Wall winery but gives COFCO access to a premium label which it can sell in China, as well as the know-how to make good wines at Great Wall and other vineyards (among them Sunny Time in Xinjiang) it has purchased in China.COFCO is well established as a food processor and bra

26、nd builder. At the same time its also shaping up to be a commodities trader. While Chinas WTO membership in 2001 was expected to open the country up to grain trading with equal access to imports for Cargill as well as COFCO in reality some of the old rules remain, such as tariffs of 65% for grain im

27、ports outside of government-granted quotas.While China has for some time been a big player in the production and consumption of grains and, increasingly is an importer of grains it has not become part of global markets in the same way as Brazil or Russia have largely because approval of import quota

28、s and market data remain tightly controlled.The likes of Cargill, Bunge and Louis Dreyfus still have a limited presence in China compared to their dominance in Europe and the Americas. Thats likely to remain the case given the rise of COFCO, and a new focus on big trading houses among G20 governments who fear the power of such firms over key farm products is driving inflation.One of Chinas largest state owned firms and a powerful player in feeding the nation, COFCO is a firm well worth watching as China makes itself felt both as a consumer and a buyer of agricultural commodities.